FDI fortunes mixed among regions and type, shows report
UN Trade & Development points to global and regional crises for subdued FDI flows, but also finds greenfield investment is a bright spot. Courtney Fingar reports.
Global foreign direct investment (FDI) flows decreased by 2% to $1.3 trillion in 2023 due to trade and geopolitical tensions impacting the slowing global economy. This is according to the World Investment Report 2024 from UN Trade & Development (UNCTAD), the seminal source of FDI data and analysis.
In a major caveat, UNCTAD cautions that the overall figure drops by more than 10% if a few European conduit economies with significant investment flow variations are excluded.
Inflows declined in more than half the top 20 recipient countries for FDI in 2023, including the top five: the US, China, Singapore, Hong Kong and Brazil. The only major host economies to see increases were Canada, Germany and the UAE.
“In a world grappling with global and regional crises, the delicate balance of FDI hangs precariously,” says Rebeca Grynspan, secretary-general of UNCTAD. “The challenges we face are multifaceted and interconnected. Geoeconomic fragmentation is reshaping the landscape of global investment. Trade networks are fragmenting, regulatory environments are diverging and international supply chains are being reconfigured.
“These shifts create both obstacles and isolated opportunities, with some countries benefiting from investments in global value chain-intensive manufacturing, while others struggle to participate in the global economy,” she adds.
International project finance and cross-border mergers and acquisitions (M&As) were especially weak in 2023. M&As, which mostly affect FDI in developed countries, fell by 46% in value. Project finance, important for infrastructure investment, was down 26%. Tighter financing conditions, investor uncertainty, volatility in financial markets and – for M&As – tighter regulatory scrutiny, were the principal causes of the decline.
Growth in developing countries
Greenfield investment project announcements offered a bright spot. Project numbers increased by 2%, with growth concentrated in manufacturing, interrupting a decade-long trend of gradual decline in the sector.
Growth was also concentrated in developing countries, where the number of projects was up by 15%. In developed countries, new project announcements were down 6%.
Investment is increasing in manufacturing sectors dependent on global value chains, such as automotive and electronics, particularly in regions with easy access to major markets. However, many developing countries continue to struggle to attract foreign investment and integrate into global production networks.
Overall, FDI to developing countries fell by 7% to $867 billion in 2023, but the decrease varied significantly across regions. While greenfield project announcements in developing countries increased by over 1,000, the distribution was uneven, with nearly half in Southeast Asia and a quarter in West Asia.
FDI inflows to Africa declined by 3% to $53 billion. International project finance fell by a quarter in terms of deal numbers and by half in value.
Flows to developing countries in Asia fell 8% to $621 billion, with China, the world’s second-largest FDI recipient, experiencing a rare decline. There were also significant drops in India and West and Central Asia, while Southeast Asia held steady.
Latin America and the Caribbean
FDI flows to Latin America and the Caribbean decreased by 1% to $193 billion. The number of greenfield investment announcements also fell, but the value of greenfield projects rose due to large investments in commodity sectors, critical minerals and renewable energy.
Meanwhile, FDI flows to structurally weak and vulnerable economies increased. Inflows to the least developed countries rose to $31 billion, or 2.4% of global flows. There were also increases in landlocked developing countries and small island developing states. But in all three groups, FDI remains concentrated among a few countries.
The downturn in international project finance, which is crucial for infrastructure in areas such as power and renewable energy, led to investment in sectors linked to the UN Sustainable Development Goals (SDGs) falling by more than 10%. The report highlights that agrifood systems and water and sanitation registered fewer internationally financed projects in 2023 than 2015, when the SDGs were adopted.
While funds for SDG investment through sustainable finance products in global capital markets is still growing, the pace is slowing. Sustainable bonds showed marginal growth in 2023, while inflows in sustainable investment funds dropped by 60%.
Sounding the alarm over SDGs
The UN has been sounding the alarm over the investment gap for the SDGs and the latest data will not provide much reassurance. “Stagnant SDG investment and insufficient funding is severely hindering implementation of the 2030 Agenda and the SDGs, particularly in least developed countries. We need urgent action to remove obstacles and provide a transparent, streamlined investment climate for sustainable development,” warns António Guterres, secretary-general of the United Nations.
The UN is encouraging policymakers to prioritise strengthening investment governance in developing countries, to ensure they direct financial flows towards the SDGs.
Greenwashing concerns related to misleading sustainability claims are increasingly affecting investor demand. Policy actions are urgently needed to mitigate the risk of a widening backlash against sustainable investment strategies.
Policymakers should also consider the negative spillover effects of sustainability reporting standards on firms outside main markets, the report says. In particular, small- and medium-sized enterprises in developing countries may struggle to meet increasing disclosure requirements, which could affect their market access and participation in global supply chains.
Despite the challenging outlook for 2024, the report suggests that modest growth is possible, with hopes pinned on easing financial conditions and efforts to facilitate investment through national policies and international agreements.
“The global environment for international investment remains challenging in 2024. Weakening growth prospects, economic fracturing trends, trade and geopolitical tensions, industrial policies and supply chain diversification are reshaping FDI patterns, causing some multinational enterprises to adopt a cautious approach to overseas expansion,” the report says.
“However, MNE profit levels remain high, financing conditions are easing and increased greenfield project announcements in 2023 will positively affect FDI. Modest growth for the full year appears possible.”
